Enormous write downs on bad loans fueled the housing recovery

The economy pulled out of the Great Recession because lenders wrote down billions in bad loans, not because borrowers paid these debts off.

The financial mainstream media often tells people what they want to hear. They’ve learned they make more money by providing emotional support to people seeking reassurance rather than providing facts and accurate analysis. This is a shame because people often make important and complex financial decisions based on erroneous or biased information they obtain from the financial press. When these investment decisions go bad, people are often wondering what went wrong. The problem is that they trusted the veracity of what they read in the mainstream media.

We’ve seen a great deal of spin and nonsense over the last few years. Barry Ritholtz wrote a post on How to Read National Association of Realtors News Release. I wrote a series of posts on self-serving bullshit from the National Association of realtors. But this goes beyond the NAr. It’s a significant portion of the financial press. For example, watch over the fall as home prices pull back. Each month, we will read about a month-over-month decline, but the reporter will reassure everyone the market rally is intact by pointing out the year-over-year numbers are still good. Are people so insecure that they need this constant reassurance? And when the assurance causes them to make bad decisions, who is responsible for that?

Several years ago, I was outraged by an article that claimed that the Drop in foreclosure rate “heroic” on part of Americans. The author stated, “Americans have done something heroic, really, in the last five years. Faced with all of this debt after the housing boom, they’ve made a lot of progress on paying it down.”

Complete and utter bullshit. The article was written to make people feel good about something they did not do, a collective Kumbaya and fake praise based on a lie people wanted to believe.

First, I would like to point out that one of our readers is a hero. Perspective really did pay down his mortgage debt by taking money out of savings. It was a difficult decision that required sacrifice, but he managed to refinance into a 15-year mortgage at a very low rate, and he is quickly retiring his mortgage debt.

That is heroic. That requires sacrifice. That isn’t what most Americans did.

Let’s take a look at the deleveraging from 2008 through 2013.

However, how do you think this really happened?

Did Ponzis suddenly start making more money during the recession and pay it down with wage income?

No.

Did anyone liquidate their assets to pay off debt? Not very many. So what is the real source of deleveraging?

Bank write offs.

Nearly all the mortgage debt retired during that timeframe was written off by banks.

Look at the astronomical charge-off rates on credit cards. That’s what happens when millions of Ponzis all implode at once.

The same pattern is evident on all consumer loans (this includes car loans). The charge-off rates were more than double the highest previous rate seen at the end of the last recession.

All loans at all commercial banks. Just as bad.

Americans are some kind of heroes, right?

The foreclosure rate came down because banks stopped foreclosing on delinquent borrowers. They went all in on can-kicking loan modifications, and they allowed those who wouldn’t agree to a modification to squat. The illusion perpetuated by the mainstream media is that “struggling borrowers” can’t make their payments due to job loss. There are a few of those people, but many are Ponzis who overborrowed and became accustomed to fresh infusions of debt to sustain their profligate spending.

The economy improved due to lower debt service levels — not because people become less thrifty, but because once they paid off their debts, they had more disposable income. An economy doesn’t require consumer debt or other artificial increases in spending to be prosperous. In fact, any expansion of consumer debt ultimately makes everyone poorer. An economy without consumer debt loses nothing to debt service. The money spent on interest and principal repayment on consumer debt is money not spent in the rest of the economy. That’s the dirty little secret bankers don’t want you to know.

In fact, any expansion of consumer debt ultimately makes everyone poorer. An economy without consumer debt loses nothing to debt service. The money spent on interest and principal repayment on consumer debt is money not spent in the rest of the economy. That’s the dirty little secret bankers don’t want you to know.

The Congressional Budget Office, which provides nonpartisan analysis for the U.S. Congress, released its 2017 Budget and Economic Outlook, which showed a forecasted nine federal funds rate hikes by the year 2020.

Wednesday, the Federal Open Markets Committee met, deciding not to raise rates again after having just raised them in the March meeting. However, housing experts explained that recent economic data supports the consensus that the Fed will raise rates in December and once more in 2017.

The CBO released a chart that shows interest rates will rise steadily, probably about three rate hikes of 25 basis points per year, and finally level out at 3% in 2020.

The current target range for the federal funds rate stands at .75% to 1%. The chart shows once the federal funds rate hits 3% in 2020, it will hold that pace for several years, remaining at 3% at least until 2027.

While 3% is a significant increase from today’s rate, the chart shows it is still substantially lower than the pre-crisis years between 2002 and 2007.

While many reports show that home prices in many markets surpassed their previous peak, Trulia’s new study shows this is just the average, and more homes than not have yet to recover their full value lost in the recession.

When it comes to individual homes, the U.S. housing market has yet to recover, according to the study. It shows just 34.2% of homes reached values surpassing their pre-recession peak.

While a full 98% of homes in Denver and San Francisco surpassed their pre-recession peaks, this is not the case across other metros in the U.S. In Las Vegas and Tucson, Arizona, for example, less than 3% of homes reached their pre-crisis peaks.

The study studied property-level home value recovery nationally and in the 100 largest metro areas by comparing the nominal value of each home as of March 1st to the nominal peak value of that home prior to the onset of the Great Recession, December 1, 2009. If the current value was greater than the pre-recession peak, the study considered that home to have recovered.

Since the recession, the share of homes that reached their pre-crisis levels has risen about five or six percentage points each year. At this rate, the study shows the market won’t see 100% of homes reach their pre-crisis levels until about September 2025.

This map shows the percentage of homes that recovered their pre-recession peak value by zip code:

If you have been following China for any significant amount of time you will likely have observed the drastic ebbs and flows that the country’s housing market regularly endures. One day the market is on fire, with the prices of housing in some cities soaring to almost unbelievable heights, and then prices suddenly top out or even start to drop and it seems as if the bubble has finally burst — but two or so quarters later prices start climbing and the cycle begins all over again.

In 2005, some international media sources first began predicting a bubble in China’s housing market. But by 2012 China was in the middle of a house buying craze. In 2013 the market continued to soar. 2014 was the year that The Economist declared to be the “end of the golden era” for China’s real estate boom, as some markets seemed on the verge of imploding. But by the end of 2015 housing in China had “turned a corner” and stabilized again. By the fourth quarter of 2016 the housing markets of some major cities were hotter than ever, and some analysts again began proclaiming that the much-touted housing bubble had finally arrived, “as expected.” But now it is the midpoint of 2017, and China’s housing markets are again in a period of stabilization, as the merry-go-round continues spinning.

It is a mistake to view China’s housing market as something left to the whims of a market economy. The system is rigged. Central, provincial, and municipal levels of government have their hands on a powerful deck of levers, which they can move up or down depending on the direction they want their respective housing markets to move in. They control supply and have a very strong influence on demand. When the market gets too hot they cool it off with policies to make home-buying unfavorable or even outright restricted; when the market gets too cool they lessen their restrictions and open up the floodgates of pent-up homebuyers. A graph of the year-on-year price change of China’s housing market since 2011 is a perfect sine wave — obediently rising and falling in direct accordance with government policy.

Many cities across China are now down shifting into a lower gear, as end-2016 saw overall home prices jump 11% year-on-year, with cities like Shanghai and Xiamen achieving gaudy annual price hikes of 31.2% and 43.8%, respectively. It was apparently time to cool things off again.

Central, provincial, and municipal levels of government have their hands on a powerful deck of levers, which they can move up or down depending on the direction they want their respective housing markets to move in.

I want to agree, but they’ve kept this dog and pony show going a lot longer than any of us expected. It seems like people have been predicting China’s downfall for as long as I’ve been on these RE blogs (over 10 years now). How long can they keep this up before the whole thing caves in on itself?

At some point, it becomes like trying to grip water. The tighter they squeeze and the more they try to control it, the more money will leak out and flow where they least expect it. I think their comeuppance will come from the excessive business and consumer debts that exploded over the last five years. I suspect they will work their printing press as hard as the Japanese when those loans go bad.

The administration of President Donald Trump continues to make progress on tax reform, Treasury Secretary Steven Mnuchin said at the Milken Global Institute Conference in Beverly Hills, California.

To an audience of investors and corporate executives at the Beverly Hills Hilton, Mnuchin said Trump’s tax plan has 80% support from Republicans in the Senate and House of Representatives, with 20% left to go. Some areas of debate since Trump took office, for instance the border adjustment tax, are off the table.

Tax reform and a cut of the corporate rate to 15% is the centerpiece of Trump’s financial agenda, Mnuchin said. “More than 70% of the tax burden on business is passed onto workers,” Mnuchin said of Trump’s focus on cutting tax rates. “This is really a jobs bill.”

Mnuchin believes rates will lead to stronger growth, helping to generate income to offset revenue declines. “We expect to pay for this through economic growth and eliminating some deductions,” Mnuchin said. A jump from trend gross domestic product growth from 2% to 3% will generate $2 trillion in revenues, he said. The Trump economic team continues to work to get a proposal through Congress by the end of 2017.

About the prospect of rising taxes in states like New York and California, who have high state income taxes that are currently deductible. Mnuchin doubled down on the elimination of this deduction, which could cause rates to rise in these states. “We don’t think it is the federal government’s job that should be subsidizing states. For people who live in places like California, which is a wonderful place to live, you may have to pay higher taxes due to lower standard deductions.”

Bush II sold his tax breaks for the wealthy on the idea that it would stimulate the economy and increase tax revenues. Instead, the economy was weak, propped up by mortgage equity withdrawal and Federal Reserve stimulus, and tax revenues fell so we went from a surplus to a deficit. The idea that cutting taxes increases growth obviously failed in that instance, and with as low as tax rates are today, I don’t see how cutting taxes on the rich will do anything other than increase the disparity of wealth distribution in the US.

Clinton told CNBC’s Becky Quick that the U.S. Treasury Department is doing what it is legally obligated to do, which is collect what money is due under American law. The real problem needs to be solved on the floor of Congress, and it demands a bipartisan solution, he said.

“We’re bailing water out of a leaky boat,” Clinton said. “This is practical economics and practical politics.”

When the current 35% corporate tax rate was signed into law in 1993, it was on par with other nations around the globe. Many of those foreign rates have since lowered their corporate tax rates, setting the scene for the current tax inversion-friendly environment. For example, Canada’s corporate tax rate is between 11% and 15%, and Ireland’s is about 12.5%.

Now the U.S. is one of the highest corporate tax rates globally, and that just won’t work anymore, Clinton said.

One gut check that you need to do when markets reach this fever pitch in mania, is simply look at the product. People get fully disconnected from value and simply assume that every crap shack is going to sell because every single second a sucker is bred into our economy. There is now a blind consensus that prices will not drop. And if they drop, it will be a tiny drop. What is telling however is that virtually all large US metros are seeing price increases. This is a nationwide trend despite house humping beer belly cheerleaders acting as if it is only happening in their tiny niche market. So the euphoria is running rampant across all areas. This brings back the idea of decoupling. The markets are as coupled as an old Taco Tuesday baby boomer couple that is building up heart disease on a massive cruise ship. There is too much bubble psychology in the current environment. Have people already forgotten that the unexpected tends to happen (just look at our President!). Yet people just forget about Black Swans and keep on trucking forward taking on mega risk. Let me show you what is happening in Compton.